What happens in an earn-out dispute over underperformance?

An earn-out ties part of the price to results after closing, so a missed target can become a dispute if the seller believes the buyer’s decisions caused it. What happens next is set mostly by the agreement, then by how quickly you act, and finally by limitation law. This page covers that sequence rather than how to draft the clause.

Start with the agreement

Treadstone Law, an Ontario firm, says the definitions of the earn-out metric, the measurement period and any operating covenants control the analysis, not what feels fair. Some agreements include covenants requiring the buyer to operate in good faith, in the ordinary course, or without actions intended to reduce the payment. The strength of a claim depends on what was negotiated and what can be proved.

Raise it promptly

The same article notes that many agreements set deadlines for objecting to a proposed earn-out calculation, and that missing them can weaken or waive your position. Ask for the calculation and its supporting records in writing, and check whether the agreement names an accountant or another process to decide calculation disputes.

Negotiation and its limits

Treadstone Law says earn-out disputes are often resolved commercially, through a partial payment, a revised structure or a lump-sum settlement, faster and more cheaply than formal proceedings. Formal proceedings remain the fallback if talks fail.

Time limits

Court claims are time-limited, and the rules are provincial. Unless the Act provides otherwise, Ontario’s Limitations Act, 2002 bars a proceeding after the second anniversary of the day the claim was discovered (s.4), and a business agreement made on or after 19 October 2006 may vary or exclude its limitation periods, other than one established by s.15 (s.22(5)). British Columbia’s Limitation Act, subject to that Act, bars a court proceeding more than two years after the day the claim is discovered (s.6(1)). Alberta’s Limitations Act runs two years from when the claimant first knew, or ought to have known, of the injury, that it was attributable to the defendant’s conduct and that it warrants a proceeding, or 10 years after the claim arose, whichever expires first, subject to the Act’s other provisions (s.3(1)). Ask a lawyer which rules apply and from what date.